Asset Collateralizability and the Cross-Section of Expected Returns

Kai Li, Jun Li, Christian Schlag and Hengjie Ai
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Kai Li: HKUST
Jun Li: Goethe University Frankfurt
Hengjie Ai: University of Minnesota

No 1029, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the implications of credit market imperfections for the cross-section of stock returns. Theory implies that the tightness of financing con- straints is countercyclical. As a result, collateralizable capital provides insurance against aggregate shocks, because it can be used to relax financing constraints. We present a production-based general equilibrium model model to quantify the effect of the above channel on the cross-section of expected returns. Consistent with the predictions of our model, we find in the data that stock returns for firms with a larger share of non-collateralizable capital are on average 4.8% higher an- nually than those for firms with a lower share. Our model can quantitatively reproduce the magnitude of the return spread as observed in the data.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1029

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